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Has the Globe just shown a newfound, if inadvertent, support for the Pacheco Law?

August 20, 2018 Leave a comment

Although we are an advocacy organization that focuses on human services, we have at times waded into the ongoing controversy over the operation of the MBTA in Boston.

The reason for that has to do with a now decades-long debate over privatization of public services and the implications of the Pacheco Law in that regard.

On Sunday, The Boston Globe reiterated its support for the privatization of T functions with an editorial that defended the current contracted operation of the T’s problem-plagued commuter rail system.

As a supporter of privatization, the Globe has, in recent years, been at the forefront of the long-running criticism in political and journalistic arenas of the Pacheco Law. But in calling on Sunday for a cost-benefit analysis prior to any proposed move to bring the T’s commuter-rail system in house, it seems to us that the Globe is also endorsing, if inadvertently, the principles and intent of the law.

The Pacheco Law requires state agencies seeking to privatize existing operations to do a cost-benefit analysis that demonstrates that the cost of privatizing the service would be lower than continuing to do the service in-house, and that the quality of service would be equal or better if it were privatized.

The Pacheco Law, which was enacted in 1993, has been a lightning rod for political criticism and controversy over the years. Much of the state’s political establishment and prominent journalistic institutions have been harshly critical of it.

We have supported the law because we see it as providing a potentially important layer of oversight and analysis in the ongoing privatization of services for the developmentally disabled in Massachusetts.

In a 2011 editorial, the Globe called the Pacheco Law “an affront to common sense,” and charged that it was allowing public employee unions to place their “demands” above “the obligation to run government efficiently.”

But in its editorial on Sunday, the Globe actually put forth an argument that appears, without directly admitting to it, to endorse the precepts of the Pacheco Law. In criticizing calls by Democratic candidates for governor for in-house operation of commuter rail when the current contract with Keolis expires in 2022, the editorial states:

Whoever is in charge in 2022, though, here’s a suggestion: Since in-house management is an idea that refuses to die, [and I would add, so is privatization, for that matter!] the state should ask the T to submit a plan showing what it would entail. If nothing else, that would clarify for the public the costs and benefits, and bring some specifics to what is now little more than a vague applause line for Democrats. (my emphasis and insertion in brackets)

That is exactly what the Pacheco Law calls for when state agencies seek to privatize services. What the Globe is calling for is the same type of cost-benefit analysis, only in reverse — from privatized services to in-house. To me, it actually sounds like a good idea.

The Sunday editorial further states that while the state “can definitely do a better job with commuter rail after its current contract with Keolis expires in 2022…the goal of better service, not adherence to ideological precepts, should guide the next governor.” (my emphasis)

Agreed, and that is also the goal of the Pacheco Law, which is to ensure better service and lower cost rather than privatizing based on ideological precepts.

The editorial contends that:

…the T doesn’t have — and never has had — the in-house ability to operate the commuter lines itself, and dumping the commuter rail system directly into an already overburdened agency risks disruption. It could also raise thorny union issues, probably raising labor costs. And there’s no reason to expect running the commuter rail in-house would result in better service. (my emphasis)

Maybe not, but in-house operation of commuter rail might actually result in cost savings.

We reported in 2015 that the annual cost to the MBTA of contracting for commuter rail services had risen by 99.4 percent since 2000, compared with a 74.9 percent increase in the annual cost of the agency’s in-house bus operations, according to cost information we compiled from public online sources.

Finally, the Globe editorial suggests that rather than bringing management of commuter rail in house, the T should consider offering the next contractor “a longer-term deal, to better align the incentives of the contractor and the state and potentially bring in private-sector money for capital investments.”

I would note here that long-term contracts are not necessarily better deals for the state or consumers. It is difficult if not impossible to project financial risks over long periods of time. As a result, long-term contracts tend to have provisions that protect private contractors from those risks while transferring the risks to the public.

Also, private investments for capital improvements must be repaid by taxpayers and riders, and those deals can be very expensive to the public. Often there is little transparency in the terms and provisions of private investment arrangements in public infrastructure.

All of these are reasons why the Pacheco Law is necessary and important to the continued efficient and effective operation of government. The law provides for an open and detailed analysis and discussion of costs and benefits when public and private services and functions come together. 

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Governor’s MBTA panel provided virtually no support for its recommendation to restrict the Pacheco Law

The Governor’s Special Panel to Review the MBTA earlier this year made some reasonable proposals to better manage the MBTA.  But the Panel report’s recommendation to remove the MBTA from the Pacheco Law’s jurisdiction appears to us to have been a misstep; and the report spent less than a sentence in explaining the rationale for its recommendation.

Based in part on the Panel’s recommendation, the Legislature suspended the Pacheco Law’s provisions for three years with regard to the MBTA, thereby removing an important means of ensuring long-term cost-effectiveness in privatizing services at the T.

The Pacheco Law’s stated intent is “to ensure that citizens of the commonwealth receive high quality services at low cost.” The Special Panel’s report asserted, however, that “the MBTA is inhibited by the Pacheco Law from procuring private, cost-effective services…”

That latter statement, which appears to constitute the sum total of the Panel’s discussion of the Pacheco Law, appears to be at odds with the stated purpose of the statute. There is no additional comment in the report about the impact of the law — not even an explanation of what the law does.

Moreover, as discussed below, the Special Panel did not appear to have consulted with state agencies that oversee procurement of supplies and services in Massachusetts, in preparing its report.  Possibly as a result, the Special Panel’s report also appears to be incorrect in stating (in that same sentence) that the MBTA is “strictly limited by state law in its use of many procurement processes (e.g., CM at-Risk and Design/Build).”  More about that below as well.

The Special Panel has previously run into criticism from CommonWealth magazine for flawed methodology on which it based a separate finding concerning employee absenteeism at the MBTA.

What the Pacheco Law actually requires

As we’ve noted before, the Pacheco Law requires a state agency seeking to privatize services to compare bids from outside contractors with a bid from existing employees based on the cost of providing the services in-house “in the most cost-efficient manner.”  The bids from both contractors and existing employees are examined by the state auditor, who must determine whether:

1. the proposed contract cost is lower than the calculated cost of providing in-house services in the most cost-efficient manner; and

2. the quality of the proposed services will be equal to or better than the quality of the services proposed by the existing employees.

What this means is that both parties — the state employees and the outside contractors — can bid to provide the services; and, if the state auditor concurs that the proposed contract is less expensive and equal or better in quality than what existing employees have proposed, the privatization plan will be likely to be approved.

The Special Panel contends that the Pacheco Law “inhibits” privatization.  But State Auditor Suzanne Bump has stated that her office has approved 12 out of 15 privatization proposals presented to the office since the Pacheco Law was enacted in 1993.

The Special Panel did not consult key state agencies that regulate procurement of supplies and services in Massachusetts

Among the 38 organizations listed by the Special Panel in its report as having provided the Panel with input, most were special interest groups, ranging from the Mass. Association of Realtors to the Conservation Law Foundation to the Boston Carmen’s Union.  But not on the Panel’s list was anyone from the office of the state auditor, which, as noted, administers the Pacheco Law, or either the inspector general or attorney general’s offices, which oversee state procurement laws and regulations.

That may explain why the Special Panel’s report stated, apparently incorrectly, that the MBTA “is strictly limited by state law in its use of many procurement processes (e.g., CM at-Risk and Design/Build).”  In fact, this is the second half of the sentence cited above, claiming that the MBTA has been “inhibited” by the Pacheco Law.  Once again, a single sentence (or rather half a sentence) constitutes the sum of the report’s discussion of an allegedly serious problem faced by the MBTA — in this case, the alleged limitations on the MBTA’s procurement options.

Construction management at-risk (CM at-risk) and design-build services are alternatives to the traditional design-bid-build approach in managing public projects.  Under the traditional approach, construction contractors bid on fully completed designs.  The alternative approaches allow for fast-tracking some construction activities before design is complete.

Despite the Special Panel’s assertion, the state’s bidding laws do provide permission to the MBTA and other state agencies to use CM at-risk for building construction projects (MGL C. 149A, Section 4), and design-build for public works projects, estimated in both cases to cost $5 million or more (MGL C. 149A, Section 16).

If the Special Panel’s concern was that the MBTA should be allowed to use CM at-risk and design-build on projects costing less than $5 million, it wasn’t stated in the report.

Email query to Professor Gomez-Ibanez

On January 28, I emailed Jose Gomez-Ibanez, a professor at Harvard’s Kennedy School and a member of the Special Panel, to ask whether he concurred with the Panel’s recommendation on the Pacheco Law.

Gomez-Ibanez has written compellingly about economic and political issues involved in the privatization of governmental functions and services.  In a 2004 working paper, “The Future of Private Infrastructure,” he stated that:

…in retrospect it is clear that we severely underestimated the difficulties of privatization. We often failed to appreciate that the challenge of privatization was not primarily technical, but also fundamentally political.

In our view, the Pacheco Law implicitly recognizes those technical and political problems of privatization.

In my email, I stated that:

It is not surprising to us that a conservative think tank such as the Pioneer Institute might draw ideologically based conclusions about privatization.  But it was surprising to me that the Governor’s Special Panel, which included faculty of Harvard and Northeastern Universities, including yourself, would support a recommendation that appears to have no written rationale to support it.

To date, I haven’t heard back from Gomez-Ibanez.

Critics of the Pacheco Law overlook the costs of privatization 

In its single statement about the Pacheco Law’s impact, the Special Panel contends that privatized services are inherently more cost-effective than in-house services, and implies that even requiring a comparison between in-house and contracted services is unnecessary.

While the Special Panel provides no explanation for its assertion about the Pacheco Law, the Pioneer Institute, one of the chief critics of the law, argues that the major flaw in the cost-competition process under the law is the following: if the state employee bid is found to be lower than the contract bid, there is nothing in the law that requires the state agency to adhere to the state employees’ bid costs going forward.

But this argument overlooks the fact that there is little to prevent contract costs from rising over time as well.

As we pointed out previously, the cost of contracting at the T appears to have risen even faster than in-house services there.  The T’s budget history appears to bear this out as well.  The budget shows contracted commuter rail expenses rising by 122.5 percent between fiscal 2001 and 2016, compared with a 75.6 percent increase in-house wages during that same period. The budget also shows “purchased (contracted) local service expenses” rising by 336.3 percent between fiscal 2001 and 2016.

One of the reasons that privatization can be expensive is that the private sector tends to pay higher salaries than the public sector for upper-level management positions, and lower wages than the public sector for lower-level positions.  So, allowing unfettered privatization of an already quasi-privatized organization such as the T would seem likely to exacerbate the problem of high executive salaries.

The Special Panel appears to have played political games with its report

I would venture to guess that at this point, some members of the Special Panel are wishing they hadn’t signed on to the product that the Panel ultimately delivered.  Whenever the final report of a panel or commission is a PowerPoint presentation, as was the case with the Special Panel’s report, it may be a tipoff that the product isn’t first-rate.

I would also venture to guess that the single-sentence (or half-sentence) critique of the Pacheco Law in the Panel’s report may have been stuck in there at the last-minute — maybe at the request of the man who commissioned the report in the first place — Governor Baker — who has made the Pacheco Law a political target of his at least as far back as his first run for governor in 2010.   Is it really a coincidence that Baker’s hand-picked commission came up with the very same recommendation about that particular law that Baker has espoused for years?

Politics and public policy obviously go hand in hand, and that’s as it should be.  But major policy decisions should not be based solely on politics.  Recent developments in the long-running saga of the Pacheco Law show how major policy decisions can, in fact, be based on ideologically biased analyses and unsupported statements from prestigious commissions.